MyRichUncle: The New Kid in Town
MyRichUncle, a new student lender, is cutting prices and raising troubling questions about whether the student loan market works for students.
For years, student loan watchers have been puzzled: if lenders really do make a killing on student loans -- as studies from the Treasury Department and the Congressional Budget Office suggest -- where is the competition that should drive down prices?
Now, it seems, it's here. MyRichUncle president Raza Khan says, “We’ve set out to change this market fundamentally from its core." The lender reduces interest rates for all students by about 15 percent (from 6.8 percent to 5.8 percent).
However, more than its discounts, MyRichUncle is attracting attention from its controversial ads questioning colleges' service to their students. Financial aid officers have taken issue.
It's true, as MyRichUncle claims, that colleges often steer students to particular banks. Moreover, banks try to win over colleges to with free meals and drinks, sailboat cruises, and disco parties as well as scholarship money, free software, and even free extra office help.
This is not to question anyone's integrity. The financial aid directors I know are idealistic and geniunely motivated by concern over students.
Nonetheless, the ads do raise questions about whether the program always puts students first. One offended financial aid director has pledged ($) not to offer MyRichUncle loans even if they are cheaper. Another lender described MyRichUncle “firing bullets at your competitors through the bodies of your customers," vivid language that puts colleges -- not students -- in the place of customers.
A few years ago, traditional lenders were slow to offer consolidation loans because they are less profitable than regular loans. A handful of new lenders enthusiastically embraced them, aggressively marketed them, and grew rapidly.
It's not clear whether MyRichUncle will have similar success. As a business matter, alienating colleges may make it difficult to reach their students. However, we should all welcome a new era of competition if it leads to lower rates for students.
In the meantime, MyRichUncle is worth watching because it does demonstrate that student loans can be profitable at lower rates. If Congress refuses to cut lender subsidies, other new lenders may join the party.
Update: The New America Foundation posted more on MyRichUncle and the "conflicting pressures on financial aid counselors" on its new blog, Higher Ed Watch. Check it out.
good stuff! when I was at the University of Arizona, I remember a "ross perot" type who was smart enough to notice that tuition rates go up when everyone (university + student) preceives that you can pay more...
i.e... the invention of the "student loan" allowed the universities to raise their prices faster than inflation and wage growth.
because of this little fact, even as a liberal, I hesitate to tell my elected officials to budget more for public universities because, in my opinion, big endownments and loans have made public subsidies way too expensive.
I'm starting to feel a lot more excited about products like "open courseware" since they'd allow students to study on their own and see if they're "cut out" for the university. Personally, I'd like us to go back to an apprentice based system since "college only learning" isn't very diverse and it would give small businesses another source of income if public money was funneled that way.
-M
October 8, 2006 4:02 PM | Reply | Permalink
Mr. Kvaal is misinformed if he thinks MyRichUncle is “demonstrat[ing] that student loans can be profitable at lower rates.”
MRU has yet to make a profit, so it can’t demonstrate that. Nor will it ever make a killing, because Congress has made sure lenders can’t. The only killing MRU will make will be from the high-cost private loans it's marketing to students.
“This is not to question anyone's integrity,” Mr. Kvaal writes in an attempt to insulate himself from the cynical, misleading and insulting tactics of MyRichUncle. To paraphrase Jerry Seinfeld, “I personally am not questioning anyone’s integrity, not that there’s anything wrong with someone else doing it.”
October 9, 2006 10:21 AM | Reply | Permalink
Ever watched David Blaine, the illusionist? Those who have know that levitation is one of his most famous illusions. There is no getting around the fact that he performs this trick extremely well, appearing to stand suspended in mid air for a few seconds. It looks real, so people watch.
Some say that MyRichUncle is worth watching. OK -- let's take a look. You only have to make a single phone call to MyRichUncle’s call center to find out that the so-called interest rate cut that they claim to be offering has strings attached. If a borrower does not make on-time payments the benefit is lost. How is this revolutionary? It looks to me that every lender in the business offers discounts for on-time payments? The only thing magical about MyRichUncle’s benefit is how they have been able to convince people that it is different from what it really is. Isn’t this what Blaine does when he levitates?
Furthermore, MyRichUncle does not pay borrower origination fees at disbursement (contrary to the industry norm and at the time when the borrower needs the money the most) but only after four years (48 months) of on-time payments. This means that MyRichUncle calculates its origination fee benefit based on the principal balance at the time of qualification (again, four years after the borrower enters repayment) instead of on the entire loan amount. The result is an origination fee rebate that is much smaller than a borrower might expect and one that is non-competitive compared to other lenders.
If the spell-bound crowd watching MyRichUncle would take a few moments to ask the right questions, it would be clear that the company’s playbook is not unlike one of David Blaine’s illusions.
Isn’t it ironic that the crowd who says it is worried that the lender recommendations made by schools could potentially discourage some borrowers from looking at all of their options also argue that the government should be the single source of federal student loans – effectively eliminating all choice from borrowers?
If a school decides to participate in the Direct Loan program over the traditional lender-based guaranteed loan program students have no choice at all. They are forced to deal with the U.S. Department of Education and they are prevented from selecting a lender that may waive origination fees or reduce interest rates for on-time payment, for example. In fact, this same crowd worries about the role financial aid professionals play when making recommendations about private lenders, but are quick to support the very same group of professionals if they make the decision to participate in the Direct Loan program, a decision that is often made by a single person at an institution despite its effect on borrowers.
In essence this crowd says that financial aid professionals should not be allowed to make recommendations about lenders based on price, service quality, longevity, and other services, but when the same person makes a decision to offer Direct Loans on campus, primarily for the reason that the financial aid professional himself wants to “simplify” the process by eliminating a student’s ability to select among hundreds of lenders, there is no corresponding cause for alarm. Why?
There is no refuting the fact that lenders provide cheaper loans and more options than the Direct Loan program does. Isn’t it telling that there is only selective outrage when financial aid professionals make decisions about student loans based on what they perceive is in the best interest of their students.
Could it be because there are clear political motivations behind the selectivity? Direct Loan advocates point to MyRichUncle because they want the illusion to be true, not because it is true. They do so to score political points by attempting to paint the traditional guaranteed loan program in a bad light. Don’t be fooled. This is not about ensuring borrowers are given more choices – it is done to promote the Direct Loan program, a program that has failed in the marketplace because it eliminates a borrower’s choice of lender and forces them to pay more for their loans.
It’s impossible to be on the side of student choice and increased competition and be for the Direct Loan program at the same time. I'm guessing not even David Blaine would attempt such a trick.
JCC
October 11, 2006 6:11 AM | Reply | Permalink
JCC, thanks for your thoughtful comments. It's true that some lenders offer students substantial discounts. However, the cost to taxpayers (compared to the cost of offering the same loan through the Direct Loan program) is many times larger than the benefit to students.
It seems to me that the best solution would be to expand direct lending and use the savings to reduce student rates. A second-best solution is to encourage competition among lenders, also to drive down student rates.
October 16, 2006 6:03 PM | Reply | Permalink